Stock price informativeness and managerial inefficiency

Liang Xu

International Review of Economics & Finance, 2021, vol. 74, issue C, 348-364

Abstract: This paper investigates whether more informative stock prices lead to managers making more efficient corporate decisions. I find a negative relationship between probability of informed trading (PIN) and firm value shortfalls, which capture managerial inefficiency. This relationship is robust to controlling for endogeneity issues and using alternative measures. Moreover, I show that stock price informativeness reduces managerial inefficiency by revealing new information to guide managers’ decisions and by enhancing corporate governance mechanisms that incentivize managers to make value-maximization decisions. This paper adds firm-level evidence to studies on the connection between stock market (informationally) efficiency and real economy efficiency.

Keywords: Stock price informativeness; Managerial inefficiency; Firm value shortfalls; Learning hypothesis; Contracting hypothesis (search for similar items in EconPapers)
JEL-codes: G14 G34 (search for similar items in EconPapers)
Date: 2021
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Citations: View citations in EconPapers (3)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:reveco:v:74:y:2021:i:c:p:348-364

DOI: 10.1016/j.iref.2021.03.006

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